Key Advice for Underwriting Apartment Properties

When acquiring apartments, be skeptical of any and all statistics that are provided to you. That was one piece of advice given to the audience during an educational session at the National Apartment Association 2013 Education Conference and Exposition.

San Diego—When acquiring apartments, be skeptical of any and all statistics that are provided to you. That was one piece of advice given to the audience during a educational session titled “From Pro Forma to Performance: How to Make Your New Asset Hum in the First 90 Days.” The session was presented during the National Apartment Association 2013 Education Conference and Exposition held here this week.

Regarding investment sales underwriting, panelists quoted from Alexandra Jackiw, managing director of McKinley: “Assume all data is suspect.” This is not necessarily because there is malice or ill intent, but “owners may have their numbers wrong,” and these errors may be perpetuated over time, said Barbara Savona, CEO of Sprout Marketing.

Dig deeply when conducting file audits, and check as many files as possible, and not just a sampling, said Jeffrey Weissman, executive vice president of multifamily operations at The Lynd Company. Weissman cited an example of one property which offered free rent for the month of December. The information was buried deep in the files, and as a result, the buyer experienced a significant income shortfall six months into ownership. As an extreme example in the case of a REO debt that was being purchased, a building was found to be missing upon site inspection.

The due diligence checklist is the “holy grail” of underwriting, said Savona. “Refer always to it,” she said. It is a “living, breathing” document, and there is nothing too obvious to include in the check list. For example, check whether the property has fines or issues with the city. Commonly overlooked items include passwords for computers, who to call for the fire alarm monitoring, and even passwords for Facebook. Such information may be harder to collect post-takeover, Weissman noted.

The checklist can be consulted both pre- and post-takeoever, said Weissman. The property manager can go over the items on checklist with the owner, which puts the onus on the owner.

In any acquisition, a business plan should be created. The plan should include information as to the current market, submarket, key metrics, the business goals and the timeframe for reaching the goals. The strengths, weaknesses and opportunities of the property should also be presented.

As regards the property takeover itself, Savona advised that the ideal takeover team for a 250- to 300-unit property would include a manager who is familiar with the company that is purchasing the property; human resources and company representatives; a leasing agent who knows the property and is ready to start; asset managers; and maintenance personnel.

During the week of the takeover, try to set the tone with both the employees and the residents, said Savona. “It may be a hostile environment; it may not be. Our focus is on residents,” but how employees are treated will affect the residents, she said. Address issues headon, instead of allowing them to fester, she said.

“Employees will be concerned about themselves and their abilities to support their families,” said Weissman. The company will need to address health benefits, 401ks, employee discounts, which could be significant, and vacation policies.

There should be an address from the CEO welcoming the employees, and in the process inspiring them to work with the new company. The welcome can provide an introduction to the new company and its mission statement.